Telefonica shares rise on O2-Virgin Media merger talks

(Reuters) - Shares in Spain’s Telefonica SA (TEF.MC) rose on Monday to post the only strong gains on an otherwise almost entirely red Madrid index, after the company confirmed it was in talks with billionaire John Malone’s Liberty Global Plc (LBTYA.O) over a possible merger of their respective businesses in Britain.

The two have started a negotiation process to merge Telefonica’s British mobile operator O2 and Liberty’s Virgin Media network company, the Spanish company said in a stock market filing.

There is “no guarantee, at this point, of its precise terms or its probability of success,” Telefonica added.

Two sources familiar with the matter told Reuters on Friday that talks were ongoing.

Telefonica shares rose shortly after Monday’s market open and were trading 3.2% higher on the day at 0809 GMT. It was the only strong gainer, barring some small positive movements for stocks including communications tower firm Cellnex (CLNX.MC).

It would be “potentially positive news for the stock if this is confirmed” Madrid-based broker CM Capital Markets said in a note to clients, adding the integration of mobile-focused O2 with a major fixed broadband provider would be complementary.

Telefonica said it would keep markets informed if a “satisfactory agreement” were reached. The company reports first-quarter results on May 7.

Along with its large European peers, Telefonica has struggled to boost profit growth in the face of fierce competition and reassure investors it can manage a debt pile which stood at 37.74 billion euros at the end of last year.

Shares are down 30% so far this year, having tracked broadly downwards for the past five years.

Its UK business, which includes O2, generated 7.11 billion euros in revenue in 2019, around 14.7% of the group’s total, and had 34.5 mobile connections on its network.

It had 6 million cable customers and 3.3 million mobile customers as of the end of 2019.

Telefonica has been weighing options for the mobile business since 2016 when a previous 10.3 billion pound ($12.8 billion) O2 takeover bid from Three UK, controlled by CK Hutchison Holdings (0001.HK), was blocked by European antitrust regulators.

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Combining O2 and Virgin Media would reshape Britain’s telecoms industry, leaving Hutchison and Vodafone (VOD.L) without their own fixed-line consumer networks and raising pressure on BT.

Uncertainty around the fate of one Britain’s biggest mobile operators, which has been repeatedly touted as a possible candidate for sale or a stock listing, would end.

The deal would also allow Telefonica a way to partially cash out from O2 while keeping a presence in Britain, where - along with Spain, Germany and Brazil - it aims to focus its efforts to boost revenue by 2 billion euros under a new strategic plan.